The new industrialists?

President Gotabaya Rajapaksa has called on industrialists to make the most of the Government’s import suspension and use the opportunity to boost manufacturing in Sri Lanka. According to a statement released on a meeting he had with industrialists this week, the President has called for them to manufacture everything from “brooms to medicine”. 

Obviously with COVID-19 sweeping through the world and infections in large countries continuing to climb there is a case to be made for boosting local production. It would also generate jobs and increase growth, but this would only be in the short term. Given Sri Lanka’s weak macroeconomics, especially high debt, it is essential that Sri Lanka push exports and attract investment but it cannot do so unless competitiveness is also ramped up and the economy focuses on linking with global value chains.   

If the Government is serious about turning around the economy, it will have to initiate difficult reforms that have been kicked down the road by successive governments. Struggling with low public revenue, the Government has slowly rolled back tax concessions it gave in December and unpopular as it is, this is necessary. Public revenue needs to grow to about 15% of GDP for Sri Lanka to sustainably fund education, healthcare, housing and other welfare support needed for as much as 40% of the population. Without taxes there is simply no other revenue source to achieve this.

Another tough but crucial step will be reforming State-Owned Enterprises (SOEs). The Government cannot keep funding its losses, but trimming the public sector will be deeply unpopular. Slashing defence allocations, which have remained the highest component of the budget despite the war ending over a decade ago, and rationalising other expenditure is also important. Strongly connected to this is effectively fighting corruption and proactively promoting transparency, which has received scant attention so far. 

Persistent issues such as relatively low ranking in the Doing Business Index, high utility costs compared to regional peers, high costs of land acquisition, and rigidity in labour laws and Government procedures remain the main impediments in terms of attracting FDIs to the country. Sri Lanka needs investment and exports to build reserves and repay debt without relying on more borrowings. So far the signs are that international assistance will be limited, making reforms the only realistic path for the Government should it chose to take the responsible route.

The Government has already limited an exhaustive list of import items that have been temporarily suspended to reduce pressure on reserves. This is necessary. But a large part of Sri Lanka’s imports are also intermediate goods that are needed for exports and limiting these will be difficult. As COVID-19 forces everyone to re-evaluate their priorities, it could also be a great opportunity for the Government to assess its import tariff structure and reform it so that it increases economic competitiveness and does not unfairly limit the choices of consumers. 

Obviously Sri Lanka depends heavily on imports, and while this comes with challenges, it also gives consumers choice and essential items at fair prices. Economists have long pointed out that Sri Lanka protects entire industries, sometimes for decades, and allows them to function as monopolies or duopolies even though they do not export products or services. The latest round of comparatively cheaper loans and import restrictions should not result in the expansion of such monopolies, and duopolies, otherwise referred to as “crony capitalists”. There should be benefits across the economy for all stakeholders.